Jim has mentioned several times about how a good company performance
will show up in the sustainable ROE numbers.
I decided to do a test. It is not very scientific as I just use the 30
DOW constituents. I used these because of the easy availability of the
ROE numbers for the last 10 years (2002 - 2011) from Valueline.
ROE10 is the average ROE over the last 10 years where provided by
Valueline. Note that numbers less than 0 and > 100% are reported by
them as NMF. I manually calculated these. I think there were only 2
companies where I didn't have the full 10 year history of ROE but I
just averaged what I had.
R10, R15 and R20 are the annualized total returns over the last 10, 15
and 20 years.
I sorted descending by ROE10 and then grouped them into 5 quintiles of
6 companies each.
ROE10 R10 R15 R20
37.5% 10.7% 7.0% 12.2%
27.1% 7.6% 6.1% 10.8%
21.6% 11.3% 10.9% 13.1%
17.6% 5.0% 3.4% 10.7%
10.9% 7.9% 2.4% 7.9%
Make of it what you will but I done think it actually shows a very strong
correlation. For example, if I remove the bottom company (AA) from the
bottom quintile, the 5 remaining companies average:
ROE10 R10 R15 R20
11.6% 10.6% 3.6% 9.1%
Obviously this takes no account of the type of business or the valuation
levels at the start and end of the periods.
This probably needs a much broader study to be of any use but I thought I'd
post it anyway.
StevnFool

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.

Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.